How does a trust compute its income tax liability?
A trust computes its income tax liability in much the same way that an individual does and is allowed most of the credits and deductions that an individual is allowed. Similarly, deductions not allowed to individuals are not allowed to trusts. For example, personal living expenses such as food, utilities, recreational expenses, children’s education, depreciation of one’s personal residence, etc. are not allowed as a trust deduction any more than as an individual deduction. Trusts are also required to prepare a Schedule K-1 for their beneficiaries, showing them the amounts distributed by the trust to them. These amounts must be reported on the beneficiaries’ returns. Q: I have been told that I can assign income to a trust and I will not be taxed on that income. Is this true? A: No. Income that is earned by one person cannot be assigned to another for federal income tax purposes. You would still be liable for income taxes due on income earned, even though it was directly paid to the trus
